Golden rule parameters shift as safety margins slim

Government borrowing is likely to soar by £17bn more than forecast in last March's budget during this year and next, the Treasury acknowledged yesterday.

Higher spending and unexpectedly low tax receipts mean the government will borrow £37bn this year - £10bn higher than forecast - and another £7bn next, according to the pre-budget report.

With additional borrowing coming through in the following years, the total for the five years from fiscal 2003-04 will soar to £152bn - £34bn above the March target. This year's extra borrowing will also put Britain in breach of the Maastricht treaty's government deficit provision under which it is limited to 3% of GDP.

The chancellor said that despite the revisions, he was sticking to his rules of keeping the budget in surplus across the economic cycle, by a margin of £14bn this time, and net debt below 40% of national income.

"So with both these rules met it is right and prudent that - as in America, Japan, France and Germany - we borrow at this, the right time in the economic cycle."

Shadow chancellor Oliver Letwin derided Mr Brown over the borrowing figures. In a reference to soaring consumer debt, he said: "You will have been warned about families who borrow a huge amount on their credit cards, but you are doing the same on the nation's credit card."

Mr Brown backed his plans to borrow more with an upbeat assessment of Britain's economic performance, which he said had overshadowed that of its main competitors. The economy is set to grow by 2% this year as forecast, and by 3% to 3.5% in each of the next two years - well above the traditional trend level, according to Mr Brown.

"I can report to the House that not only have we met our forecast but cumulatively since 2000, Britain's economic growth has been stronger than Japan, the euro area and the USA."

Even manufacturing, in decline last year and barely registering any growth this year, is expected to turn in growth of 1.75% to 2.25% in 2004 and 2005. Business and fixed investment are likely to rise sharply, according to the forecasts. But Mr Brown said: "We remain vigilant to both inflation and the continuing risk of global imbalances, an uneven world recovery and geopolitical uncertainties."

City analysts and business responded cautiously to the chancellor's forecasts.

The CBI applauded the decision to raise borrowing rather than taxes, but said it remained concerned about the longer term outlook. "The chancellor may still meet his golden rule, but the safety margin is disappearing fast," said a spokesman.

Nick Parsons, an economist at Commerzbank Securities, said the chancellor could have chosen to be "a bit more humble" in this forecasts for economic growth. "He is testing the markets' credibility a bit, though probably not beyond breaking point. He is going to have to get an awful lot going right simultaneously."

Roger Bootle, at accountancy firm Deloitte, warned the £14bn cushion represented only a small margin for error which would be swallowed up if the economy failed to grow as quickly as expected.

"The overall picture is of a chancellor crossing his fingers very tightly in the hope that domestic and global economic recovery will lead to several years of rapid expansion.

"If not, he will almost certainly be be forced to scale back his spending plans - or more likely raise taxes."